Paulson Clients Said to Pull Less Than 10% From Two Hedge Funds

October 11, 2011, 12:25 AM EDT

Oct. 11 (Bloomberg) -- John Paulson, the billionaire hedge- fund manager having the worst year of his career, has received less than 10 percent in redemption requests for his Recovery and Credit Opportunities funds for year’s end, according to two people familiar with the firm.

Withdrawal orders for those two funds, which together managed about $15 billion as of July 31, were due at the end of September and may give some indication of what total redemptions could be across all of Paulson’s funds, the worst-performing of which has tumbled 47 percent this year. Investors in the rest of the funds, including his flagship Advantage Plus, have until the end of October to put in withdrawal notices.

Some long time clients said they are staying put because the 55-year-old manager made $15 billion in 2007 betting on a tumble in subprime mortgages.

“We’re going to give Paulson the benefit of the doubt,” said Trip Kuehne, founder of Double Eagle Capital Management LP, a Dallas-based firm that has invested with Paulson since 2005. “I believe in him and his firm and don’t plan to pull my money.”

While investors who have been in the Advantage Plus fund since its 2005 inception are still up 268 percent over the life of the fund, clients who came in at the beginning of 2008 have made 4.3 percent, according to Bloomberg calculations.

Armel Leslie, a spokesman for Paulson, declined to comment on redemptions or performance.

Gross Redemptions

Every big dive in U.S. equities in recent weeks, especially in stocks such as Citigroup Inc., Transocean Ltd. and Capital One Financial Corp. that count among Paulson’s largest holdings, has caused speculation that the New York-based firm is selling shares to meet redemptions.

Paulson and his employees account for about half of the firm’s $30 billion in assets, according to the two people. Redemption periods for outside investors are staggered, and if every client eligible to pull money from Paulson funds at year’s end did so, redemptions would be about $6 billion, or roughly 20 percent of total assets, according to Bloomberg calculations.

On average, gross redemptions for Paulson’s funds at the end of any given year have averaged about 10 percent, according to two people familiar with the firm, who asked not to be identified because the information is private. At the end of 2008, when some hedge funds were limiting withdrawals, Paulson investors pulled 26 percent of assets, the people said. A net $10 billion came out of the firm at that time, they said.

Paulson, who started his hedge fund in 1994, has been betting on a U.S. recovery before the end of next year.

Advantage Plus Fund

His Recovery fund, which is designed to make money as the economy improves, has tumbled 31 percent this year and the firm’s Credit Opportunities fund, which invests in distressed debt, has fallen 18 percent, according to three investors who asked not to be named because the fund is private.

His oldest fund, Paulson Partners, which bets on the shares of merging companies, is down 10 percent, the investors said.

Paulson’s Advantage and Advantage Plus funds, which wager on distressed companies and companies going through corporate events including restructurings, have fallen 33 percent and 47 percent respectively this year through September, according to investors. Those two funds accounted for $15.7 billion in assets as of July.

--With assistance from Kelly Bit in New York. Editors: Steven Crabill, Josh Friedman